Commercial Property Weekly Market Overview and Indicators

Escalator Capital

Willem Tait,

In line with the ZumaSpear, Rael Levitt on Carte Blanche (again), plus the Lions being kicked out of the Superugby fold, this week I have decided to rather group my commercial property thoughts, opinions and maybe a little judgment into one article as appose to 5 or 6 and you can read the whole article in 5min. Welcome to let me know if this works for you. Any suggestions are welcome.

Interest Rates: The outlook for the property market appears upbeat, provided that interest rates hold. Low interest rates use to be the core driver of market activity, but we have not seen this in the past three years and it has done little to stimulate significant buyer activity. The fact of the matter is that any increase would have a negative effect on buyer sentiment, so at PropX we will be keeping a close eye on interest rates.

Asking Prices: Sellers still need to price conservatively with the main driving force being conditions of finance i.e. deposit vs loan to value. Some commercial properties offer good value for owner occupiers in the R5mil to R15mil mark, but banks are coming back with a 50% loan to value ratio, suggesting that a buyer must pay a 50% deposit. I would therefore suggest that developers consult with a couple of banks as regard the viability of a new project, purely based on conditions of finance for the end user. If possible, structure a financed deposit product with a bank.

Buyer Market: It is still a buyer market, at least for buyers with cash, able to acquire a property at a good rate per square meter compared with the construction and development replacement value. The replacement value has always been a good indicator or guideline as regard value. In short, if you buy a property below the replacement value, you are buying something that can be replaced at a cheaper rate. At PropX we usually consult with a QS (Quantity Surveyor) as regard the replacement value before mandating a property.

Capitalisation Rates: A slowing economy could result in an increase of vacancy rates. Same should result in a mild rise in capitalisation rates closer to the end of the year with a downward pressure on real commercial property values. At PropX we advise our landlords to make sure that they have good quality legal leases in place and rather renew earlier than later i.e. keep your property let with monthly income.

Broker Perceptions: The general perception from our broker community (5200 national brokers) is that the market is very competitive and more time consuming than before. I would therefore advise our landlords and developers to supply 100% accurate information on vacancy schedules and easy access to properties. Go the extra mile when presenting a property to brokers via email or web, including photos, location maps and research of the area into the pack.

Leasing: What can we say about leasing? I still believe in the old approach of - I show, you like, you sign here - in concluding a leasing deal. Keep it simple. The success of leasing property is directly linked to the number of visitors to that property. Yes, according to a couple of market research papers in the past two months the leasing market is looking better in specific areas, favouring landlords with new buildings in great locations. The method to this madness is however directly linked to the fact that it is a tenant market. We are basically steeling tenants from older properties and placing them in new properties at a good rate per square meter, compared to the older property

In Closure: I could go on and on with more insight and subjects, but more about this next week. For now, rest assure that we are in a buyer and tenant market, cash is king, interest rates will have an role to play and lease out your new buildings as quickly as possible, because no one is developing new stock.

Escalator Capital